Collateral, Rationing, and Government Intervention in Credit Markets

33 Pages Posted: 30 Dec 2006 Last revised: 11 Jun 2008

Multiple version iconThere are 2 versions of this paper

Date Written: July 1989

Abstract

This paper analyzes the effects of government intervention in credit markets when lenders use collateral, interest, and the probability of granting a loan as potential screening devices. Equilibria with and without rationing are examined. The principal theme is that credit policies operate through their effect on the incentive compatibility constraint, which inhibits high-risk borrowers from mimicking the behavior of low-risk borrowers. Any policy that loosens (tightens) the constraint raises (reduces) efficiency. Most government credit programs explicitly attempt to fund investors that cannot obtain private financing. In the model presented here, these subsidies increase the extent of rationing and reduce efficiency. In contrast, policies that subsidize the nonrationed borrowers, or all borrowers, are efficiency enhancing, and reduce the extent of rationing.

Suggested Citation

Gale, William G., Collateral, Rationing, and Government Intervention in Credit Markets (July 1989). NBER Working Paper No. w3024. Available at SSRN: https://ssrn.com/abstract=463466

William G. Gale (Contact Author)

Brookings Institution ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-797-6148 (Phone)
202-797-6181 (Fax)

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